Expanding into the United States offers Canadian businesses major opportunities, but it also comes with complex tax obligations. Whether you’re setting up a subsidiary, operating a branch, or simply selling into the U.S. market, corporate tax compliance is a critical part of your cross-border strategy.
This guide breaks down the essentials of U.S. corporate tax for Canadian companies in 2025 — from federal requirements like Form 1120 to state-level filings, payroll taxes, and treaty considerations. You’ll learn how Canadian corporations are taxed in the U.S., key deadlines to track, and the implications of making the wrong filing choice.
Our goal is to give Canadian companies a clear, practical resource that connects U.S. tax requirements with the realities of running a cross-border business. Throughout this guide, we’ve included links to our dedicated service pages and related blogs so you can dive deeper into specific topics as you plan your U.S. operations.
TL;DR: What Canadian CFOs Should Know First
- When you’re taxed federally in the U.S.
If your Canadian company’s activities rise to a U.S. trade or business (USTB) and generate effectively connected income (ECI), you’re taxed on that income and generally required to file Form 1120-F.
- Deadlines matter
Missing the 1120-F filing deadline can mean losing the ability to claim deductions and credits. The IRS only allows them if you meet timely filing rules (including the 18-month relief window).
- Branch vs. U.S. subsidiary
Operating as a U.S. branch can trigger an additional branch profits tax under IRC 884 (default 30%, often reduced under treaty) on top of regular corporate tax. A subsidiary is taxed differently and may change your overall exposure.
- Withholding on U.S.-source payments
Non-U.S. entities face a default 30% withholding on U.S.-source FDAP payments unless a treaty applies or you provide the IRS with Form W-8ECI for effectively connected income.
- Sales tax & states
After the Wayfair ruling (2018), states can impose economic nexus standards for sales tax — and many now assert income-tax nexus as well, going beyond P.L. 86-272 protections.
Are you engaged in a U.S. trade or business (USTB) and earning ECI?
For Canadian companies, the first question the IRS asks is whether your activities in the United States rise to the level of a U.S. trade or business (USTB). If they do, any U.S.-source income that is effectively connected income (ECI) becomes taxable in the U.S.
What counts as a USTB?
The test focuses on whether your U.S. activities are a material factor in generating income. Examples include:
- Maintaining an office or warehouse in the U.S.
- Having employees or dependent agents regularly conducting business in the U.S.
- Providing services on U.S. soil that contribute directly to revenue.
Even limited activities can qualify as a USTB if they’re central to earning the income.
Treaty overlay
The Canada–U.S. Tax Treaty can reduce or eliminate U.S. tax exposure. Under Article VII, business profits are generally taxable in the U.S. only if your company has a permanent establishment (PE) there — such as a fixed place of business, branch, or dependent agent with contracting authority.
However, many Canadian companies choose to file a protective Form 1120-F even if they believe they are treaty-exempt. Filing protectively helps preserve deductions and avoid penalties if the IRS later determines that a PE exists.
If you’re unsure whether your business activities create a USTB, it’s best to review your situation with a firm experienced in cross-border corporate tax services.
H2: Filing Form 1120-F (and why timeliness is critical)
If your Canadian corporation earns effectively connected income (ECI) in the U.S., you’re generally required to file Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. Even if you believe your income is exempt under the Canada–U.S. Tax Treaty, many companies file a protective 1120-F to preserve deductions and avoid penalties.
Who must file
- Foreign corporations with ECI: Required to file Form 1120-F.
- Treaty-exempt corporations: Often file a protective 1120-F to ensure deductions and credits are available if the IRS later disagrees with the treaty position.
Key deadlines
- No U.S. office or place of business: File by the 15th day of the 6th month after year-end (for calendar-year filers, June 15).
- With a U.S. office: File by the 15th day of the 4th month after year-end (for calendar-year filers, April 15).
Why timeliness matters
The IRS is strict about deadlines. If Form 1120-F is not filed on time, deductions and credits can be denied unless you qualify for the 18-month relief rule under Treasury Regulation 1.882-4(a)(3). Filing on time is the safest way to protect your tax position.
Extensions
Corporations can request an automatic six-month extension by filing Form 7004 on or before the original due date of Form 1120-F.
Branch profits tax vs. subsidiary dividends
Canadian companies expanding into the U.S. often face a key structural choice: operate through a U.S. branch or form a U.S. subsidiary. The tax outcomes differ significantly.
Branch profits tax (IRC 884)
Foreign corporations with a U.S. branch are subject to the branch profits tax under Internal Revenue Code section 884. This tax applies to the dividend-equivalent amount, which is generally the branch’s after-tax earnings that are considered repatriated. The default rate is 30%, but the Canada–U.S. Tax Treaty typically reduces this rate for Canadian residents.
This tax is levied in addition to regular U.S. corporate income tax, meaning a branch can face a two-layer tax: corporate tax on its U.S. earnings, followed by branch profits tax on amounts treated as if remitted to the home office.
Subsidiary dividends
If a Canadian parent company operates through a U.S. subsidiary, the subsidiary is a separate legal entity. After paying U.S. corporate tax on its income, the subsidiary may distribute earnings as dividends to the Canadian parent. These dividends are generally subject to U.S. withholding tax, with rates reduced under the Canada–U.S. Tax Treaty.
Treaty context
The Canada–U.S. treaty and its Technical Explanation provide reduced rates for both branch profits tax and dividend withholding, provided the Canadian company meets limitation on benefits (LOB) rules. Because treaty eligibility depends on corporate structure and ownership, companies should confirm their status before relying on reduced rates.
Getting paid from the U.S.—W-8 forms, FDAP, and ECI
When Canadian companies earn income from U.S. sources, the way payments are classified determines how much tax is withheld before funds even reach you.
30% default withholding (Chapter 3)
By default, many fixed or determinable, annual or periodical FDAP payments made to foreign corporations are subject to 30% withholding. This includes items such as interest, dividends, rents, and royalties. The rate can be reduced under the Canada–U.S. Tax Treaty (see IRS Tax Treaty Table 1) or eliminated entirely if the payee certifies that the income is effectively connected income (ECI) using the appropriate W-8 form.
Which W-8 form applies?
- Form W-8BEN-E — Used by foreign corporations to claim a reduced treaty rate. To qualify, you must meet the limitation on benefits (LOB) rules under the treaty.
- Form W-8ECI — Used to certify that income is effectively connected with a U.S. trade or business. This allows you to avoid the 30% withholding at source, since the income will be reported and taxed on Form 1120-F instead. Note: this form does not apply to personal services performed by individuals.
FIRPTA and real estate
Special rules apply to U.S. real property under the Foreign Investment in Real Property Tax Act (FIRPTA). Buyers of U.S. real estate from foreign corporations are generally required to withhold a percentage of the purchase price, regardless of treaty benefits.
Read more about how W-8 forms work and what Canadian companies need to file in our dedicated blog.
If you form a U.S. subsidiary instead of a branch
For many Canadian companies, operating through a U.S. subsidiary can be a cleaner way to enter the American market compared to running a branch. A subsidiary is treated as a separate legal entity, which changes the filing and compliance landscape.
EIN and setup
Every U.S. subsidiary needs an Employer Identification Number (EIN). Foreign-owned entities can apply by phone (through the IRS’s international applicant line) or by submitting Form SS-4. Without an EIN, the subsidiary cannot open a U.S. bank account, hire employees, or file tax returns.
Form 5472 reporting
If the U.S. subsidiary is 25% or more foreign-owned and engages in reportable transactions with related parties, it must file Form 5472 each year. For disregarded entities (DEs), Form 5472 is filed along with a pro-forma Form 1120. Penalties for failing to file — or for incomplete filings — are steep and accrue quickly.
Transfer pricing compliance
Subsidiaries must comply with transfer pricing rules for all transactions between the Canadian parent and U.S. subsidiary.The rules are set out under Treasury Regulation §1.482-1. To gain certainty and avoid double taxation, companies may seek an Advance Pricing Agreement (APA) with the IRS, or rely on the Mutual Agreement Procedure (MAP) process through the treaty.
State & local—sales-tax and income-tax nexus
Beyond federal rules, Canadian companies must also navigate state and local tax obligations when doing business in the U.S. These vary widely by state and can significantly impact your compliance requirements.
Many states now require remote sellers to collect and remit sales tax once they exceed economic nexus thresholds. These thresholds are usually based on annual revenue or the number of transactions with customers in the state.
For Canadian businesses selling goods into the U.S., it’s important to track where these thresholds are met, since non-compliance can trigger back taxes, penalties, and interest.
While federal law P.L. 86-272 protects companies whose only U.S. activity is the solicitation of orders for tangible personal property, this protection is narrow. It does not apply to service businesses, software companies, or most modern digital activities.
Recent guidance from the Multistate Tax Commission (MTC) has further limited the scope of P.L. 86-272, particularly for companies with internet-based operations. Each state applies its own rules, meaning Canadian companies must evaluate income-tax nexus on a state-by-state basis.
Read more about state income and sales tax nexus in our dedicated guide for Canadian businesses.
People on the ground—payroll & social security
Hiring employees or placing staff in the U.S. can trigger payroll tax and social security obligations that go beyond corporate income tax rules.
Employees in the U.S.
If your Canadian company employs individuals working in the United States, you may be required to withhold and remit U.S. payroll taxes, including federal income tax, Social Security, and Medicare. State-level payroll taxes and unemployment insurance contributions may also apply, depending on where the employee works.
Totalization agreement (CPP vs. U.S. Social Security)
To prevent double social security taxation, Canada and the U.S. have a Totalization Agreement. Under this agreement, employees remain covered under only one country’s system — usually the system of their home country.
Canadian employers can request a Certificate of Coverage to keep employees in the Canada Pension Plan (CPP) and exempt them from U.S. Social Security contributions. This certificate must be obtained before the assignment begins to ensure compliance and avoid duplicate withholdings.
Learn more about payroll compliance and the Canada–U.S. Totalization Agreement in our dedicated guide.
